social impact bonds power point

Educational Institutions Client Update:

Social Impact Bonds

H. Todd BullardPatrick M. Malgieri

99 Garnsey RoadPittsford, NY 14534

585.419.8800www.harrisbeach.com

Educational Institutions Client UpdateFebruary 2014© Harris Beach PLLC, 2014

I. What is a “Social Impact Bond” or “Pay forSuccess” Contract?

It is NOT secured by real property (ad valorem) taxrevenue, full faith and credit and does not count against amunicipality’s debt limit.

The Social Impact Bond (“SIB”) is an innovativefinancing approach to fund social programs with thegoal of achieving positive social outcomes that canbe measured.

SIBs are a creative way to have government get accessto capital from the private sector to pay for not-for-profitsto expand, innovate and reward programs that work.


I. What is a “Social Impact Bond” or “Pay forSuccess” Contract? (cont.)

The SIB agreements are also called Pay for Success(“PFS”) contracts that contain performance clauses fordeliverable and measurable successful outcomes in theagreements with the government.

The PFS is, in essence, a contract entered into with aNot-for-Profit to provide services to a governmental entityinitially financed with funds raised from the private sector.

[See Flow Charts entitled Social Impact Bonds (BasicDeal Structure and Repayment)]


II. Potential Services Covered by SIB or Payfor Success Contracts

Poverty

Recidivism related toIncarceration

EducationalImprovement

Reduced Crime

Higher Employment inspecific neighborhoods

Better HealthOutcomes

Elder Care

Child care for lowincome persons

Veteran’s Services

Affordable Housing


III. Potential Structure of SIB

The most common model involves a governmentalentity (“City, County, Town”) entering into a contractwith a private-sector not-for-profit often called an“Intermediary entity” to provide social services [SocialImpact Bond Contract].

The governmental entity ultimately pays the intermediary(not-for-profit) entirely based on the successfulachievement of performance goals.

The performance goals are intricately measured by anindependent party to evaluate if the performance goalshave been achieved.


III. Potential Structure of SIB (cont.)

The intermediary initially obtains funds to provide thecontracted service by raising capital from independentcommercial or philanthropic investors who invest in theSocial Improvement Bonds and/or the Social ImpactBond Contract.

If the outcome is reached (or exceeded) as desired by thegovernmental entity, the payments to the privateinvestors are funded by the government, typically on thebasis of accrued cost savings achieved by thegovernment as a result of the improved outcomes.


III. Potential Structure of SIB (cont.)

If outcomes are not achieved, the governmentdoes not pay and investors lose their funds.

The SIB structure is an innovative way to“outsource” the delivery of key social servicesto a private party and pass the initial risk ofthe effective delivery of such services ontothe private investor and the not-for-profitservice provider.


IV. Background – Recent Incentives

The intent is to encourage innovation in service deliverymodels and better customer service. As described below,both New York City and the State of Massachusetts areexploring SIB arrangements.

United Kingdom, “Peterborough Social Impact Bond”: Thiswas the first initiative utilizing SIBs. The Intermediary is anot-for-profit corporation called Social Finance, Inc. Thegoal is to reduce the recidivism rate of parolees.

Recently, the Ministry of Justice has published some interimresults that shows a reduction in reconviction rates of 6%.


IV. Background – Recent Incentives (cont.)

New York City: Mayor Michael Bloomberg established the first SIB inthe United States. His initiative is directed at providing services to 16to 18 year olds jailed at Riker’s Island. The initiative aims to reducerecidivism, and the related budgeting and social costs.

Bloomberg’s clearly defined goal is to reduce recidivism by 8.5% to20% with payments coming to the investors with a premium if those goalsare met.

Goldman Sachs is the primary investor in the New York City initiative.Recently, Goldman has established a $250M “social impact” fund.

The intermediary is a not-for-profit called MDRC. The results areexpected in 2016.

Massachusetts: The state has issued an Request for Response (RFR) tosolicit services to address Homelessness.


V. Roles of Parties

The government’s private sector partner in thepolicy initiative, called the “Intermediary”, isresponsible for raising the capital to fund theoperating cost and assemble the team of serviceproviders. (See Flow Chart).

An Evaluating entity (“Evaluator”) is charged withmeasuring outcomes.


V. Role of Parties (cont.)

The governmental entity provides the funds torepay the investors, including a premium, if thesocial programmatic goals are successfully metor exceeded.

The investor provides key initial funding for theservice providers to pursue innovative andcreative methods to achieve measurable results.


VI. Criterion for SIB

The social impact bond must meet certain criteriafor appropriate use. There must be high net benefits to taxpayers and investors

in outcome or goals.

Measurable outcomes

Well-defined treatment populations [African-American orHispanic males ages 16-18; unemployed living in aparticular and easily identifiable census tract, etc.]

Credible Impact Assessment-[Good Evaluators]

Built in Safeguards to prevent harm to“treatment population.”


VII. Strategies for Implementation

Sustained attention from top government officials

Identify outcomes and social problems tobe addressed

Identify Key stakeholders

Identify service providers

Identify interested private investors


Social Impact Bonds:

Structure Charts


SOCIAL IMPACT BONDS(Basic Deal Structure)

Government Agency

[Sets Outcome andGoals]

[Intermediary]

External

Not-for-profit

Evaluator Entity

Service ProviderService Provider

Investors

(Pay for SuccessContract for services)

(Social Impact BondAgreement)

Working

Capital

Funding Funding


SOCIAL IMPACT BONDS(Repayment if successful outcome)

Government Agency

Not for Profit EntityInvestor

RepaidInvestmentplus returnon premium

Pays funds forSuccessful Outcome

(cost savings accruingto Gov’t)


Social Impact Bond Finance Model (“SIB”)

for

Early Childhood “Pay for Success”(“PFS”) Contracts


SIB for PFS

The challenges to a PFS project often involve thefollowing:

1. obtaining strong and well-grounded statisticalresearch that firmly establishes an economic linkagebetween an intervention and an early childhoodbenefit,

2. formulating and drafting contracts between theparties in a PFS project, which capture thebenefit monetarily and which all parties are willing tosign, and

3. adequately monetizing the returns within atimeframe acceptable (3 to 5 years) to investors.


SIB for PFS

The following conditions and steps should be in place andundertaken to implement a successful SIB project:

Conditions:

State laws and regulations must be in place authorizing state agencies andjurisdictions to enter into PFS contracts. (New York has such legislation).

Working within state laws and regulations, private, philanthropic, andgovernment leaders agree to target a socially important outcome. Forexample, increasing school readiness of pre-k children and increasing literacyrates by the Third Grade.

Feasibility research should be completed to ascertain whether a specific childdevelopment intervention is applicable to particular children or populationswithin the government’s geographic jurisdiction and can the interventionproduce enough near-term government cost avoidance and longer-termoutcome improvements to justify investment.


SIB for PFS

Deal Structure:

Once feasibility is established by the research study, private andphilanthropic investors provide the necessary capital to createand establish an intermediary to manage the PFS project. Theintermediary can be any kind of for-profit, non-profit, or specialpurpose government entity. In other contexts, intermediaries arereferred to as “lead contractors” or “enterprises.”

The intermediary and the government entity enter into a contract,in which the government agrees to pay the intermediary a“success payment” to the extent cost avoidance and/or outcomeimprovements are achieved within an agreed upon time period.


SIB for PFS

Deal Structure:

The intermediary enters into a contract with pre-k providers toprovide high quality pre-k education services to cohorts ofchildren. The pre-k providers and the children served arecomparable to those analyzed in the feasibility research.

The intermediary and government together enter into acontract with an independent evaluator to determine eachyear whether the special education assignment rate of the PFSpre-k graduates is lower than comparable children who did nothave pre-k service and by how much. If there is no costavoidance or outcome improvement, the government owes nopayment to the intermediary.


SIB for PFS

Deal Structure:

The intermediary raises capital from philanthropic, private andgovernment sources to pay for the pre-k services and for theoperations of the intermediary. The capital raised can takemany forms.

i. From philanthropies, the capital can be outright grants or project-related investments (PRIs).

ii. Private capital will almost always involve dividend or interestpayments and debt instruments which will be repaid.

iii. Government capital can take the form of guarantees,matching funds, or any of the forms available to philanthropic orprivate investors.


SIB for PFS

Deal Structure:

The intermediary pays for its operations with funds fromphilanthropy and pays for pre-k services with funds from private,philanthropic and government sources.

The justification for private investment and philanthropicinvestments is “cost avoidance”—the near-term financial return onthe investment.

The justification for philanthropic grants and governmentsubsidies and guarantees is “outcome improvement”—the long-term economic and social long-term returns on early childhoodinvestments.


SIB for PFS

Deal Structure:

As special education cost avoidance occurs as well as theintended literacy improvements and such conditions areconfirmed by the evaluator, success payments are made to theprivate and philanthropic investors.

Under many circumstances, special education cost savingsexceed the amounts required to be paid to the investors. Thisresidual is paid to the state government and is available forany purpose including increasing the number of children servedby the project.

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